Evergrande’s risk for Brazil is linked to Chinese demand for iron ore

The result of the financial markets’ drop caused by the Evergrande crisis depends on how the Chinese government will react and its ability to manage confidence in the Chinese real estate sector. It will also depend on the level of a slowdown in China’s growth in the near future.

Together with the consolidation of the steel sector and the effects of regulatory adjustments by the Chinese government on the real estate market as a whole, the pace of the slowdown is expected to affect the demand for raw materials exported by Brazil, mainly iron ore.

Welber Barral, the former foreign trade secretary and a partner at Barral M Jorge Consultores, says that the fear in the markets is justified, as the crisis involves the largest Chinese real estate state company in a country where civil construction represents a third of GDP. He doesn’t expect it to turn into another “Lehman Brothers”, however, as there isn’t the same indebtedness based on bad credits.

The effect of the crisis in the medium-term will depend on the reaction of the Chinese government. Its reaction will determine the level of growth in the Asian country and the demand for raw materials, which is, he says, the big issue for Brazil.

For economist Livio Ribeiro, a researcher at the Brazilian Institute of Economics of the Getulio Vargas Foundation (FGV Ibre), the main risk to Brazil at the moment is iron ore.

“There are two things that are going hand-in-hand and that didn’t start with Evergrande, but there is a spike in the company,” he explains. One is precisely the set of penny-pinching adjustment policies in the real estate market on both the supply and demand sides that are culminating in the company’s most pronounced slowdown at this time.

There is also a consolidation of the Chinese steel sector, which is a long-term policy under development at this time as well. “The picture results in a downturn in the real estate sector, with a strong discussion about whether there will be a crisis of confidence in the Chinese real estate sector, and a drop in steel demand, which should lead to lower ore prices.”

Source: Valor Econômico

To read the full original article, visit the link:

https://valor.globo.com/brasil/noticia/2021/09/21/risco-da-evergrande-para-o-brasil-est-ligado-demanda-chinesa-por-minrio-de-ferro.ghtml

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